Short-maturity Treasuries benefited from continued weakness in stocks, but longer-maturity issues sold off in response to the news that soon-to-be-corrected errors have caused the Consumer Price Index ( definition | chart | source ) to be understated. Long-maturity Treasuries were also hurt by the news that this week's buyback will not target any long-maturity issues.

The benchmark 10-year

Treasury note fell 5/32 to 99 14/32, lifting its yield 2 basis points to 5.825%.

The 30-year

Treasury bond slid 22/32 to 104 25/32, boosting its yield 4.9 basis points to 5.905%. At the

Chicago Board of Trade

, the December

Treasury futures contract shed 14/32 to 98 11/32.

But the two-year Treasury note rose 2/32 to 100 4/32, trimming its yield 3.5 basis points to 6.052%, even as the Treasury Department sold $10 billion of new two-year notes in its monthly auction.

Short-maturity Treasuries benefit from weakness in stocks because they are a safe-haven investment -- a parking place for money that has come out of the stock market. Even though stocks didn't fare too badly today, their persistent weakness lately is emboldening buyers of short-maturity Treasuries.

"People are thinking that the stock market may be a bigger trade down the road," said Mark Sauvigne, government bond trader at

Chase Securities

. "Going into October people get spooked." That is to say, the stock market's history of crumpling in October has some bond investors speculating that short-term Treasuries could come strongly into demand.

"It looked like there was a huge allocation out of stocks and into

two-year notes," added Bill Kirby, co-head of government bond trading at

Prudential Securities

. The new two-year note was awarded at a yield of 6.002%, and demand for the issue was strong. The

bid-to-cover ratio was 2.93, the highest in over two years.

But long-maturity Treasuries got whacked.

The CPI development --

reported in today's

Washington Post

and then partially confirmed by the

Bureau of Labor Statistics

-- threw the first punch.

Calculation errors have resulted in the CPI inflation rate being understated by 0.1 to 0.3 percentage points, according to the story. Overall inflation was running at a rate of 3.4% in August, while core inflation, which excludes food and energy, was running at 2.5%, nearly a two-year high. A higher inflation rate devalues long-term bonds because it erodes the purchasing power of the fixed interest payments they make.

The BLS, which will release amended data for January to August at 10 a.m. EDT on Thursday, today said only that the increase over that period will be revised to 2.7% from 2.6%. It also said that the error was in the portion of the report that measures housing costs, and that software was responsible for it.

The news hurt long-term bond prices not only by indicating that inflation is running at a faster pace, but also by hurting the chances that the

Fed will cut interest rates in the next several months, since doing so could nudge the inflation rate even higher. "It takes the ease out of the market,"

Barclays Capital

Treasury market strategist Gemma Wright said. "We have higher inflation than we thought. I don't think

the Fed's going to rush into an ease any time soon."

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But while the CPI news hurt the prices of regular long-term Treasuries, it gave a boost to Treasury inflation-protected securities, or Tips. Tips' principal is indexed to the CPI, so an upward revision to the index will boost returns on Tips in the months ahead.

Meanwhile, the Treasury Department's buyback announcement also hurt regular long-term Treasuries. The department

announced that tomorrow's buyback will target only

callable issues, of which there are very few. Standard Treasuries that had rallied based on the expectation that they would be buyback targets this week had to give up those gains.

Economic Indicators

In other economic news,

durable goods orders

(

definition |

chart |

source

) rose 2.9% in August, slightly more than the 2.7% gain projected by economists polled by

Reuters

. Excluding orders for expensive transportation equipment, which rose 6.5%, new orders were up 1.9% for the month. At 3.2%, the year-on-year growth rate of durables orders in August was the lowest since March 1999.

The report revised July's results lower. Durables orders fell 13.1% in July, compared to an original estimate of 12.4%. The ex-transportation decline was revised to 5.5% from 4.7%.

Separately, the weekly

Mortgage Applications Survey

(

definition |

chart |

source

) detected a slight pick-up in refinancing activity and a slight drop in new mortgage activity. The Refinancing Index rose to 451.3 from 440.7, while the Purchase Index fell to 307.9 from 318.8.

Currency and Commodities

The dollar fell against the yen and the euro. It lately was worth 107.37 yen, down from 107.54. The euro was worth $0.8830, up from $0.8826. For more on currencies, see

TSC's

Currencies column.

Crude oil for November delivery at the

New York Mercantile Exchange

fell to $31.46 a barrel from $31.50.

The

Bridge Commodity Research Bureau Index

rose to 226.69 from 226.33.

Gold for December delivery at the

Comex

rose to $281.60 an ounce from $277.30.